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Former Chairman of Morgan Stanley Asia Stephen Roach : Bringing the Chinese Consumer to Life

 

By Stephen S. Roach   History will be the ultimate judge, but there is good reason to believe that China’s recently completed Third Plenum will come to be regarded as a pivotal moment in the country’s development. At long last, China’s senior leadership has endorsed a raft of reforms that could impel the economy’s shift from reliance on exports to consumption-led growth.

 

Until now, this transformation was framed in terms of broad goals and aspirations. For example, the 12th Five-Year Plan, adopted in March 2011, promised the emergence of a consumer-led economy, resting on the building blocks of urbanization and the development of an embryonic services sector. Notwithstanding the importance of these commitments in setting out opportunities for China’s middle class, they lacked a critical component: incentives for Chinese families to convert their newfound income into discretionary consumption.

 

On the contrary, financial and economic insecurity has gripped Chinese households since the “iron rice bowl” – the cradle-to-grave support that the socialist state offered workers and their families – was discarded in the late 1990’s. Fearing for the future, households have hoarded incremental income, rather than spending it on consumer goods. Economists call that precautionary saving. China’s leaders called it frustrating.

 

The reforms endorsed by the Third Plenum focus on this wedge between income and consumption, offering specific proposals aimed at altering the behavior of fear-driven Chinese families. Especially important is the proposal to channel 30% of the profits of state-owned enterprises (SOEs) – currently running at close to $400 billion – into the country’s woefully under-funded social safety net. China’s national health-insurance plan, for example, boasts nearly universal coverage, but the benefits it provides are negligible.

 

The same is true of China’s retirement system: the workforce’s enrollment rate is around 50%, but only $600 of assets per worker (in national, local government, and private pension schemes, combined) are available to cover lifetime retirement benefits. Little wonder that Chinese families, fearful of such an uncertain future, save to excess. An adequately funded safety net could go a long way in tempering the expectations underlying this behavior.

 

Several other measures proposed at the Third Plenum seek to shift Chinese families’ behavioral norms. A major reconsideration of the one-child policy is especially important, given the need to relieve pressures arising from the inevitable decline in China’s working-age population. Reform of the hukou (residency permit) system to allow citizens to transfer their welfare benefits from one city to another is vital for an increasingly flexible labor force that now includes almost 200 million migrant workers.

 

China’s consumers should also draw comfort from the likely move to market-based deposit rates on their savings accounts, which will reinforce incremental growth in wage income. This long overdue policy shift is an important component of the Third Plenum’s official elevation of market-based pricing as the “decisive” mode of resource allocation in China.

 

The word “decisive” holds important implications for key resources – including fuels, financial capital, and, of course, the currency – that historically have been subject to state-administered pricing. Rhetorical flourishes have always been an important signaling mechanism for major policy changes – think of Deng Xiaoping’s “reforms and opening up” of the late 1970’s. The Third Plenum’s use of “decisive” to anchor a market-based approach is a similar gambit.

 

All of this casts modern China’s development strategy in a new light. Beginning with Deng in the late 1970’s, scientists and engineers – technocrats with the determination to convert a dysfunctional centrally planned economy into an investment- and export-led colossus – framed and implemented a producer-oriented development model. Today, the task at hand is very different: to transform the technocratic framework of the producer model into the aspirational vision of a flourishing consumer society.

 

The need to navigate this shift raises the toughest question of all: Is the new “fifth-generation” Chinese leadership, headed by President Xi Jinping, up to the challenge? There are three reasons to believe that it is.

 

First, the role of technocrats in China’s senior leadership is on the wane. Research by Cheng Li of the Brookings Institution reveals that only about 15% of the current 25 Politburo members are engineers and scientists, down from 40% in 2007 and 72% in 2002. Li’s analysis points to the related ascendance of senior officials trained in law and the social sciences – providing a skill set that is more closely aligned with the vision of a consumer society.

 

Second, the Third Plenum established a new high-level organization – the so-called Central Leading Group on Reforms. This small group, likely to be headed by Xi, will play the key role in drafting specific guidelines for implementing the Plenum’s proposed reforms – thus threatening to marginalize the long-dominant technocrats of the National Development and Reform Commission, the heir to the old State Planning Commission.

 

Finally, Xi’s power base is far broader than that of his two predecessors, Jiang Zemin and Hu Jintao, both of whom had shaky transitions in the first years of their leadership. Unlike Jiang and Hu, Xi assumed quick command of the Chinese Communist Party, the government, and the military, and very effectively shepherded the Third Plenum’s historic reforms.

 

As always, proof will come only with implementation. But with China’s leaders now focusing squarely on aligning the vast population’s behavioral norms with the next phase of transformation, the case for a consumer-led China has become more compelling than ever.

 

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of the forthcoming book Unbalanced: The Codependency of America and China.

 

Copyright: Project Syndicate, 2013.
www.project-syndicate.org

 

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